Internal and Forensic Audit · Internal Audit of Specific Functions

Internal Audit of Treasury, Finance and Banking

Updated 11 October 2026 · Fact-checked

Internal audit of treasury checks that cash, bank balances, borrowings, investments and foreign exchange exposure are authorised, recorded, safeguarded and within policy. You identify risks, test controls such as segregation of duties and reconciliations, verify evidence, and report gaps with practical recommendations.

Understand Internal Audit of Treasury, Finance and Banking

The treasury function manages the company's liquidity, funding, investments and currency exposure. It decides how much cash to hold, where to park surplus, how to raise money and how to protect against rate and currency movements. Errors or fraud here can be large in value and fast in effect.

The internal auditor's job is not to run treasury. It is to give assurance that treasury works within the board-approved policy, that controls operate, and that records are accurate and complete. You look at four areas: cash and bank, borrowings, investments, and foreign exchange. You also look at the treasury risk framework across them.

Start with the main risks. Liquidity risk is being unable to meet payments. Credit and counterparty risk is a bank, issuer or borrower failing to pay. Market risk covers interest rate, price and currency movements. Operational and fraud risk covers unauthorised payments, misposting and weak access. Compliance risk covers breach of law, loan covenants and internal limits.

The core controls are the same ideas you know from internal control. Authority limits, segregation of duties between dealing, confirmation, settlement and accounting, independent reconciliations, dual authorisation of payments, and regular management reporting. Where the person who deals also records or settles, the control is weak.

In the exam, think in a chain: policy, authority, execution, recording, monitoring, reporting. If you test each link for each area, your answer will be complete and well structured.

Key rules to remember

Bank reconciliation: Balance as per cash book ± reconciling items = Balance as per bank statement; Reconciling items include cheques issued but not presented, cheques deposited but not credited, bank charges, direct credits and errors. Check for old unpresented items.
Current ratio (liquidity check): Current ratio = Current assets ÷ Current liabilities; Used to judge liquidity position. Interpret against the entity's industry and policy, not a fixed number.
Debt service coverage ratio: DSCR = Earnings available for debt service ÷ (Interest + Principal repayment due); Lenders often set a minimum in covenants. The auditor checks the covenant compliance calculation.
Interest accrual on borrowings: Interest = Principal × Rate × Time (years); Use to recompute interest expense and check accrued interest at the period end.
Foreign exchange gain or loss on settlement: Gain or loss = Foreign amount × (Settlement rate − Transaction rate); For a receivable, a higher settlement rate is a gain. For a payable, it is a loss.

How to solve Internal Audit of Treasury, Finance and Banking questions

Use this sequence for any question on audit of treasury, finance or banking. It keeps the answer structured and covers risks, controls and evidence.

1Identify the area in the question: cash and bank, borrowings, investments, forex or the overall treasury framework.
2State the key risks for that area in one or two lines, such as fraud, misstatement, liquidity or non-compliance.
3Check the policy and authority: board-approved policy, limits, delegation, and who may sign or deal.
4List the controls to evaluate: segregation of duties, dual authorisation, reconciliations, confirmations and system access.
5Describe the audit procedures and evidence: inspect documents, recompute, confirm with third parties, reconcile and test samples.
6Link each finding in the facts to a control weakness and its possible impact.
7Conclude with recommendations and reporting: corrective action, owner, timeline and escalation to the audit committee.

Quickest way: Risk, control, test, report

When to use it: Use when you have limited time and the question asks you to list audit steps or controls for a treasury area.

Write the area as a heading and give two key risks.
List four to six controls as short bullets.
Write matching audit tests: confirm, reconcile, recompute, inspect, sample.
Add one line on reporting the exceptions to management and the audit committee.
If facts are given, name the weakness in the facts first, then give the fix.

Common mistakes in Internal Audit of Treasury, Finance and Banking

Listing generic audit steps without tailoring them to treasury.
Students memorise a standard audit programme and reuse it for every function.
Fix: Name treasury-specific items: bank confirmations, loan covenants, investment limits, hedge documentation and dealing authority.
Ignoring segregation of duties between dealing, confirmation, settlement and accounting.
Students focus on balances and forget who performs each task.
Fix: Always state that the person who deals must not confirm, settle or record the deal.
Treating bank reconciliation as only matching the two balances.
The arithmetic looks like the whole task.
Fix: Also check who prepares it, how often, whether it is reviewed, and whether old reconciling items are investigated.
Verifying borrowings only from the ledger.
Ledger balances look complete and easy to vouch.
Fix: Confirm with lenders, check sanction letters, security, repayment schedule, covenants and interest recomputation.
Treating forex hedging as a risk-free activity or ignoring unhedged exposure.
Students assume a hedge removes all risk.
Fix: Check the policy, hedge ratio, counterparty, valuation at the reporting date and the open exposure.
Ending the answer without a report or recommendation.
Students think listing procedures is enough.
Fix: Close with findings, risk rating, recommended action and reporting to the audit committee.

Worked examples

Example 1

During an internal audit of Sundaram Textiles Ltd, you find that the same accounts executive prepares bank payment advices, uploads them to the net banking portal, approves them and also prepares the bank reconciliation. Identify the risks and recommend controls.

Show the solution

Area: cash and bank payments. The facts show one person performing initiation, approval and reconciliation.
Risk: there is no segregation of duties. Unauthorised or fictitious payments can be made and hidden in the reconciliation.
Risk: errors would not be detected because there is no independent review.
Control 1: separate the roles of initiator, approver and reconciler, with a maker-checker setup on the banking portal.
Control 2: set payment limits by authority level, with dual authorisation above a threshold.
Control 3: have the reconciliation prepared by someone who does not handle payments and reviewed by the finance head monthly.
Audit test: sample payments and match them to invoices, approvals and bank statements. Review user access rights on the portal.
Report the weakness to management and the audit committee with a timeline for correction.

Answer: The combination of initiating, approving and reconciling payments is a serious control gap that exposes the company to fraud and undetected error. Segregate duties, introduce maker-checker with limits, have an independent monthly reconciliation review, test a sample of payments and report the gap with recommendations.

Example 2

Ashoka Pharma Ltd took a term loan of ₹2,40,00,000 at 10% per annum on 1 April. No repayment is due in the year. The books show interest expense of ₹20,00,000 for the year ended 31 March. Using recomputation, state whether the interest is correct and what else you would audit on this borrowing.

Show the solution

Recompute interest: Principal × Rate × Time = ₹2,40,00,000 × 10% × 1 year.
₹2,40,00,000 × 10% = ₹24,00,000.
Compare with the books: ₹24,00,000 − ₹20,00,000 = ₹4,00,000 short.
Conclusion: interest expense is understated by ₹4,00,000, unless a part of it is validly capitalised, which must be supported by the accounting standard conditions and documents.
Other procedures: obtain the sanction letter and agreement to verify rate, tenure and security.
Obtain a lender confirmation of the outstanding balance and accrued interest.
Check covenant compliance, such as DSCR limits, and whether any breach was disclosed.
Check the board approval for borrowing, creation of charge and filing of related forms with the Registrar.

Answer: Recomputed interest is ₹24,00,000, so the books are understated by ₹4,00,000 unless proper capitalisation is shown. Also verify sanction terms, lender confirmation, covenants, security and authorisations.

Exam tips

Structure every answer as risk, control, audit procedure, reporting. Examiners reward this clear chain.
In case-based questions, quote the weakness from the facts first, then give your recommendation.
Use treasury vocabulary: dealing, confirmation, settlement, counterparty limits, hedge, covenant, reconciliation.
Where numbers are given, recompute and show the working. Even a simple interest check earns marks.
Do not cite section numbers unless you are certain. Name the law or rule in plain words instead.

Practice questions from Internal Audit of Specific Functions

Internal Audit of Treasury, Finance and Banking in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Internal Audit of Treasury, Finance and Banking: frequently asked questions

What is the main objective of internal audit of treasury?

It is to give assurance that cash, funding, investments and forex are managed within board policy, with proper controls and accurate records. It also highlights risk exposures and recommends improvements.

How do you audit cash and bank balances as an internal auditor?

Review cash count procedures, bank reconciliations, signing authority and payment controls. Obtain bank statements and confirmations, investigate old reconciling items and test a sample of receipts and payments to supporting documents.

How do you audit borrowings and investments?

For borrowings, check approvals, sanction terms, lender confirmations, interest and covenants. For investments, check policy limits, authority, custody, valuation and income recorded, and confirm holdings with custodians or issuers.

What are the key treasury risks?

The main ones are liquidity, credit and counterparty, market (interest rate and currency), operational and fraud, and compliance risk. Your audit plan should link each risk to a control and a test.